Economics Short Run Vs Long Run Costs Questions Medium
Average variable cost (AVC) is a measure of the cost per unit of output in the short run. It is calculated by dividing total variable cost (TVC) by the quantity of output produced. AVC represents the variable costs incurred by a firm to produce each unit of output.
In the short run, firms have both fixed costs (FC) and variable costs (VC). Fixed costs are those that do not change with the level of output, such as rent or insurance. Variable costs, on the other hand, vary with the level of output, such as labor or raw materials. As a result, in the short run, firms can adjust their variable inputs to some extent but are unable to change their fixed inputs.
The relationship between AVC and short-run costs is that AVC is a component of total cost (TC) in the short run. TC is the sum of fixed costs and variable costs. Therefore, AVC is influenced by both fixed and variable costs. If a firm experiences an increase in variable costs, such as an increase in the price of raw materials, the AVC will also increase. Similarly, if a firm can reduce its variable costs, the AVC will decrease.
In the long run, all costs become variable as firms have the flexibility to adjust both their fixed and variable inputs. This means that firms can change their production capacity, expand or reduce their facilities, and adjust their inputs to optimize their production process. In the long run, firms aim to minimize their average total cost (ATC), which includes both fixed and variable costs per unit of output.
The relationship between AVC and long-run costs is that AVC is a component of ATC. ATC is calculated by dividing total cost (TC) by the quantity of output produced. As firms have the ability to adjust both fixed and variable costs in the long run, they can optimize their production process to minimize their ATC. This means that if a firm can reduce its AVC in the short run, it can contribute to reducing its ATC in the long run.
In summary, average variable cost (AVC) represents the cost per unit of output in the short run. It is influenced by both fixed and variable costs. In the long run, firms have the flexibility to adjust both fixed and variable costs, aiming to minimize their average total cost (ATC). Therefore, the relationship between AVC and short-run and long-run costs is that AVC is a component of both total cost (TC) in the short run and average total cost (ATC) in the long run.